Nifty could swing between 5,750 and 6,250 in 5 sessions

Technically speaking, the Nifty and Bank Nifty both appear to have broken down

 

The Reserve Bank of India (RBI) policy induced a downtrend and the US Federal Reserve's decision to accelerate the taper has added to the selling pressure. The Nifty is testing support at 6,000. This is just above the 200 Day Moving Average and if that breaks, the index could fall quite significantly. However, there is an interim support at every 50-point interval and if the market holds at above 5,950-6,000, it could bounce till 6,150-plus quickly.

Technically, the Nifty and Bank Nifty appear to have broken down. The short-term trend is negative and the intermediate trend may also be so. If the Nifty drops below the 200 DMA, the long-term trend will be called into question.

The Bank Nifty is well below its 200 DMA and has lost 10 per cent in 10 sessions. It is hyper-sensitive to rate changes and the Fed's decision to accelerate the taper will also lead to a shift in the dollar-rupee rate, to again affect financials disproportionately. Since the Bank Nifty has a very high weight in the Nifty (and other broader indices) it could be instrumental in pulling down overall price levels. Other rate sensitives have reacted badly. The Bank Nifty could have a distance to fall yet, since it has not yet fully discounted the impact of tapering. A bearspread of long 10,000p (224) and short 9,500p (82) could be a good bet. This costs 142 and it could yield a maximum of 358. The rupee could come under pressure. First the taper will have a natural effect of pushing up US government treasury yields, though this will be counter-balanced to some extent by the RBI's hike. More dangerously, the taper might lead to foreign institutional investor (FII) selling, to raise the downward pressure on the rupee. If the dollar gains, Information technology (IT) and, to some extent, pharma will have to play the role of hedges. The CNXIT could be an outperformer.

The Nifty's drop below 6,150 was a breakout of the prior trading range, 6,150-6,350. The market has slid to 6,000. If it doesn't hold between 5,950 and 6,000, it will break down below the 200 DMA. A move below 5,950 could mean a bearish long-term trend. Breadth indicators are poor. The advance-declines ratio has turned negative. Retail has gone bearish. The net institutional position is net bearish, with domestic institutional investors and the FIIs net sellers in January.

The Nifty's put-call ratio is positive at 1.2. This could indicate the market will hold on to support at 5,950-6,000 and correct upwards. If it bounces, it could have a clear run till 6,150-plus where it will run into heavy resistance. Option traders should assume the Nifty could swing anywhere between 5,750 and  6,250 in five sessions. Intra-day volatility is likely to rise. The strangle of long 6,000c (123) and long 6,000p (86) has break-evens at 5790 and 6210. The February bullspread at long 6,100c (73) and short 6,200c (39) costs 34 and pays a maximum of 66. The bearspread of long 5,900p (53) and short 5,800p (31) costs 22 and pays a maximum 78. This is a better risk:reward payoff, given these spreads are zero-delta with the Nifty held at 6,002.

A strangle involving a long 6,100c and a long 5,900p offset with a short strangle of short 5,800p and short 6,200c costs 56 with break-evens at 5,844 and 6,156. So this risk:reward is somewhat unattractive. It may be worth waiting for more premium decay in a short settlement before taking strangles.